Are cryptocurrencies like ponzi schemes?
Indian Finance Ministry says Bitcoin is like a Ponzi
The Indian government raised concerns that cryptocurrencies are like ponzi schemes.
The sad fact of the matter, most all investments behave like a ponzi scheme system. This does not mean they are in fact ponzi schemes. Applying this profound revelation to the market of cryptocurrencies is biased because it neglects that the modern stock markets and real estate markets also behave like ponzi schemes.
Capital is invested, causing prices to increase, garnering more interest for a given sector whether it is real estate, stocks or cryptocurrencies. As more interest is raised, more investment flows into a sector, creating the virtuous cycle of faster increases in asset values. Eventually this becomes a bubble. The severity of the bubble is made worse by central banking systems which keep interest rates artificially low, preventing free market competition for where capital is invested.
Even though these bubbles happen, underlying a stock is a real asset which is the business operation. Underlying real estate securities, is the real estate itself.
What is the underlying value of Bitcoin?
Some would think Bitcoin has no underlying value. I used to believe this myself when I first learned of Bitcoin. Getting past this misconception took me a little time but in essence what gives Bitcoin a value is that anyone at all pays anything for a Bitcoin.
Bitcoin's basis for valuation began when people would pay pennies for a coin. As soon as anyone at all started assigning it value, Bitcoin entered a whole new realm of use cases as an actual currency. That someone would pay pennies for a bitcoin, meant that people could buy thousands of dollars in bitcoin, and send transactions internationally within minutes. That initial value that someone arbitrarily gave Bitcoin, turned Bitcoin into a viable system for payments which were never before possible.
Now that this process of payments and remittances began, the use cases now also include Bitcoin as the base trading pair for many cryptocurrency exchanges.
The underlying value then is the usability of the coin at any price, thus meaning it has value so long as this usability remains preferable and viable in the market place. The underlying value can be eroded if exchanges switch base-pair currencies. The underlying value can be likewise diminished if people no longer want to send payments in bitcoin.
Bitcoin as a payment vehicle creates upward pressure on price
In order to send Bitcoin for payment, a person must buy Bitcoin. That purchase and subsequent sale puts a net pressure on the Bitcoin market to increase prices. First, the Bitcoin is bought. Then funds are sent. Then the recipient sells the Bitcoin. When thousands of people do this daily, the net effect is there is a perpetual load of people holding bitcoin after purchasing it. This net pressure is to the upside, creating value.
Conclusion:
In effect, it is wrong to say "nothing is backing Bitcoin". In terms of tangible assets, certainly nothing physical backs Bitcoin. Yet, intangible assets are a real thing in the business world, the IRS recognizes them as real for tax purposes.
Bitcoin is backed by multiple intangible assets, each of which are the primary use cases for it as a currency. Cryptocurrency as a whole should transcend into the trillions before the bubble is fully realized, but temporarily we could be in a bubble when we evaluate the quality of crypto projects we are seeing.
how is that going to effect will be interesting as india as a country share the top most % share in cryptos
Well given the Indian government decided the demonetize a large portion of their own fiat currency, it's hardly a surprise that they have eroded confidence in it. They are not even bothering with the illusion of legitimacy that any decent ponzi will manage for a time. Give that many people have been pushed towards the use of crypto by government action, I doubt a bit of predictable rhetoric from that same government will have them selling off any time soon.
I think a lot of people get the wrong definition of Ponzi scheme. My definition of a standard one is just a investment where the old investors are paid a return by newer investors. I think the definition being used by Indian Finance Ministry isn't this one. They merely define it an asset that is in a bubble.
For fiat currencies, there usually isn't anything backing them either. They only have value because people have faith or see a useful value to those currencies.
Yeah I agree. I have seen cryptocurrency as a better form of fiat currency. It's nice because one of the old arguments against a gold backed currency is that gold has industrial uses, and if we tie up gold reserves in order to conduct a currency is inefficient.
It's a bad argument because Thomas Edison proposed an alternative to a gold reserve currency which was viable. Plenty of ways to do it. We just invented a new way of doing it that the governments can't easily squash.
Ponzi is the wrong word to describe cryptocurrencies.
LIke any asset, a crypto is worth exactly what someone is willing to pay for it. In the case of Bitcoin, I feel like the current transaction costs are too high for it to have anything other than "stored" value. It's a great asset to "save".
As for cryptos in general, the prevailing challenge is in creating a system with nominal transaction fees and reasonably stable value. Tether tries to accomplish this with "tying" the currency to the USD. Ada offers a different solution by using a unique PoS that works like a lottery to verify blocks.
Right now, it costs nearly $9 to validate a bitcoin transaction in less than 4 hours. That makes it impractical as a payment medium.
Large sums, it is still great. International wires cost $20 to $40 and take 5 days to complete. While this reason may not resonate with the average reader, this is what I am referring to. Business payments. For example, a business that wants to order products from China, if your order is large, it's easier to send BTC than it is to wire money. There are certainly better currencies for the task, but BTC can handle very large sums now that the market cap and volume carries such a valuation.
For large international transactions BTC is a great medium of payment.
Thanks for the concise explanation. Only time will tell.
financial ministry saying that lol how they will differentiate between a currency and scam lol
so does this create an impact on the market price seems like a big news
i fear these statements now whenever someone says against bitcoin prices plunges down boom
Good explained and easy to understand. Good work!